After 210,000 blocks get mined (roughly after four years), block rewards given to the bitcoin miners to process transactions gets reduced in half. The event is called halving due to fact that the rate of releasing bitcoins into circulation is cut in half. This is how bitcoin enforces synthetic price inflation till all the bitcoins get released. The reward system will keep on going until 2140 until the proposed 21-million limit is hit.
If you are planning to open an account with Bitcoin Circuit, read on to know a bit more about the process of halving.
The impact of halving
Halving starts a chain reaction that goes somewhat like this:
The reward goes halved > the inflation is halved > lower supply available > rising demand > rising prices > miner incentives remain intact
If a halving doesn’t raise the prices and demands, the miners will get no incentive. Thus, there would be smaller rewards to complete transactions, and the bitcoin value will not be too high.
In order to stop this, bitcoin changes the difficulty level of what it needs to get the mining rewards. In simple words, the mining difficulty of a transaction changes. If the reward is halved and the bitcoin value hasn’t increased, the mining difficulty would be lessened to make sure the miners are incentivized. It means that the number of bitcoins released as rewards continues to be smaller, but there is less difficulty in processing a transaction.
It has proven successful twice. Until now, halving has led to an increase in prices followed by a major drop. However, the crashes following the gains have continued to maintain prices much higher than the ones before the halving event.
The recent halving took place during a global pandemic and in the situation of increased regulatory speculation, celebrity hype, and greater institutional interest in digital assets. Due to such added facts, where the prices of bitcoin will end up settling in the aftermath is still not clear.
How does halving impact investors?
Generally, halving leads to an increasing in prices for the bitcoin because of surging demand and reduced supply. Thus, it is good news for the investors. Also, trading activities on the bitcoin’s blockchain raises the anticipation of halving. But the rate of price increase varies depending on the conditions and logistics of every price halving.
What is the impact of halving on miners?
The impact of mining on the ecosystem of bitcoin is complex. Now, a reducing bitcoin supply raises prices and demand. On the other hand, fewer rewards might also make it hard for small mining outfits or individual miners to thrive in the bitcoin ecosystem as they might find it hard to compete with the larger mining organizations.
The mining capacity of bitcoin is countercyclical to its prices. Therefore, the number of miners in the ecosystem decreases when the price of cryptocurrency increases, and vice versa. Halving events are characterized by an increase in prices and raise the prospects of a 51 percent attack on the bitcoin network as miners go out of the network. Thus, the network makes it less safe and secure.